OmniVision: Stay Away From This Value Trap

Usually, when I see a tech company with solid products and a bulletproof balance sheet getting its share price absolutely creamed, I salivate. That's often a ticket to huge returns. But in the case of OmniVision Technologies (Nasdaq: OVTI) , I'm making an exception.

Revenue for the maker of digital camera chips fell 30% year over year to $164 million for the second quarter. Add in a $7.5 million goodwill impairment charge, and last year's $0.36 of earnings per share evaporated in a cloud of red ink -- $0.10 per share, to be exact. Great parlor trick, but it doesn't look good in an earnings report.

Management urged analysts not to panic, because the balance sheet is still strong, with $283 million in liquid assets and only $38 million in debt. And while OmniVision's customers "are being conservative, people are watching their own channels and inventories," according to sales Vice President Ray Cisneros, and the company's top-of-the-line chips with all-digital autofocus seem to be gaining traction in the market.

Of course, you can have all the technology advantages you want and still lose money if nobody is buying camera phones. If I ran Nokia (NYSE: NOK) or Motorola (NYSE: MOT) these days, I'd certainly slow down my production lines until the recession is over. Given that OmniVision still bought back $13 million of its own shares last quarter and has that solid cash balance to fall back on, it seems like the company can survive a couple of lean years.

The buyback sort of makes sense. OmniVision's stock hasn't been this affordable since 2002, in the wake of the dot-com bubble. But, that doesn't mean you should buy it right now. Management gave guidance for a loss next quarter on slower sales. Add in a recession affecting the entire food chain -- consumer, phone producer, chip maker -- and investors buying today could be in for a bumpy, drawn-out ride. Ideal buying opportunity, this is not. (Did I just channel Yoda?)

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Overall the article is good but you have one item factually incorrect:

> it's a nifty feature that other camera sensor

> makers apparently haven't quite figured out yet

Incorrect. Other providers of this technology are software companies Dblur, DXO and Tessera, who provide the technology to OVT's competitors. For example Kodak can provide the same feature using DXO sofware, Samsung with Tessera, ST Micro with Dblur, and so on.

So you call it a "competitive advantage", I would call a level playing field - it's a technology available from multiple vendors.

Also TI doesn't make image sensors. It makes image signal processors, so not relevant to the story about an image sensor maker or even about the autofocus technology.